The Stocks and Shares ISA is a powerful investment account. With it, an investor can access a vast range of assets (stocks, funds, ETFs, etc) and not pay a penny of tax on capital gains or dividend income.
Want to see how such an ISA can be used to build a substantial amount of wealth? Here’s a look at how much money an investor could potentially build up if they stuck £500 into one of these accounts every month for the next 10 years.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Investment ISA returns
With most Stocks and Shares ISAs, investors are responsible for choosing their own investments. So, there’s no set or fixed return – the return will depend on the investments selected.
Put together a strong portfolio and returns of 7%-15% per year on average are achievable over the long run (one would have to be a very good investor to obtain returns of 15% per year). Make too many mistakes in terms of asset selection or portfolio construction, however, and an investor could be looking at low-single-digit or even negative returns.
Let’s assume that an investor did have a strong portfolio (more on how to achieve this below). I calculate that £500 invested per month would grow to around:
- £83,000 at a 7% annual return
- £92,000 at a 9% annual return
- £101,000 at a 11% annual return
- £112,000 at a 13% annual return
- £123,000 at a 15% annual return
Note that the contributions would total £60,000 after 10 years. So, depending on the final return achieved, the investor could have potentially made a lot of money (tax-free).
Building a strong portfolio
What does a strong portfolio look like?
Well, for starters, it’s diversified (invested in many different stocks). So, if some stocks tank, the portfolio won’t be impacted too badly. Big losses can really hurt an investor’s long-term returns.
It’s also diversified across different areas of the market such as tech stocks, healthcare stocks, international stocks, and small-cap stocks. That way, if one area of the market underperforms, overall returns can still be decent.
Aiming for higher returns
If an investor is targeting higher returns, it can also be worth having some exposure to growth stocks that have a lot of potential. This can improve their chances of beating the market.
An example here is Amazon (NASDAQ: AMZN). Over the last 10 years, this company’s share price has climbed from around $33 to $220, meaning that it has outperformed major indexes like the FTSE 100 and the S&P 500 by a wide margin.
So, even if someone just had 2%-3% of their portfolio in the stock a decade ago (and the rest in broader indexes) they’ve probably done really well and beaten the market because Amazon is up almost 600%.
Is Amazon worth a look today? I think so and it’s one of my largest holdings at present.
Today, this company operates in a range of growth industries including online shopping, cloud computing, AI, digital advertising, and space satellites. So, I see a lot of growth potential over the next decade.
Of course, it’s not without risk. A slowdown in consumer spending or a lack of business spending on AI are risks that could temporarily derail the growth story.
All things considered though, I’m excited about the investment potential.
